MSFT, states gird for final showdown

Return to court for closing arguments Wednesday

By

WilliamL. Watts

WASHINGTON (CBS.MW) -- It's all over but the arguing in the trial to determine whether Microsoft should be subject to harsher antitrust curbs.

In closing arguments set for Wednesday, attorneys for Microsoft
MSFT, -3.39%
will face off in court against counsel for the nine states that contend a proposed federal settlement of the four-year antitrust case doesn't go far enough.

The decision, which isn't likely for months, will be up to U.S. District Judge Colleen Kollar-Kotelly, who presided over a nine-week trial that produced tens of thousands of pages of testimony and evidence.

Meanwhile, the case has all but slipped off the market's radar screen. Microsoft shares, which had once reacted sharply to early developments in the case, have seemingly paid little heed to developments since the company struck a proposed settlement deal with the Justice Department and nine states last November, agreeing to behavioral remedies that are expected to do little to slow down the software giant.

"I believe the markets are looking past the trial and have largely discounted any potential negative outcome, which means if you do have a negative outcome where the (federal) settlement is amended or rejected in any material way, there is some potential in this stock for investors to react to it," said Erik Olbeter, a policy analyst with Schwab Washington Research Group.

Kollar-Kotelly can draft whatever remedy she feels is appropriate.

The nine states contend the proposed federal settlement is riddled with loopholes that will allow Microsoft to use the monopoly power of Windows to quash nascent threats to its dominance of the market for personal computer operating systems.

Microsoft says the federal settlement actually goes beyond the scope of any wrongdoing found at trial and upheld by a federal appeals court. The company has accused the states of doing the bidding of envious competitors that want to see Microsoft shackled.

Wednesday's proceedings promise to offer a full day for attorneys and trial watchers, with each side allotted three hours to make their case.

In voluminous written briefs, both sides outlined last week competing legal paths to the decisions they would like to see Kollar-Kotelly make in the case.

The U.S. Court of Appeals for the District of Columbia Circuit last summer upheld unanimously a finding by the original trial judge that the company engaged in anticompetitive acts designed to illegally maintain its Windows monopoly on the personal computer operating systems market.

The appellate court threw out two other findings against Microsoft, as well as an order to break the company in two. It also removed U.S. District Judge Thomas Penfield Jackson from further proceedings and returned the case to district court for a new remedy. Kollar-Kotelly was then selected randomly to preside over the proceedings.

Among the states' proposed remedies, Microsoft would be required to offer a modular version of Windows that would let computer makers remove individual pieces or any combination of software bundled with the operating system. Computer makers would be able to substitute non-Microsoft products.

Microsoft witnesses, including company Chairman Bill Gates, argued during the remedy trial that it would be impossible to remove code without undermining the overall quality of Windows. Compliance would pose other huge technical burdens, likely forcing the company to pull the Windows operating system from the market, Gates and other company officials said.

The states said the company was exaggerating the difficulty of building the modular system, and that its protests were belied by Windows XP Embedded, a version already on the market that allows users to construct a customized version of the operating system.

The federal settlement requires Microsoft to let computer makers hide the functionality of the bundled software, but doesn't require the company to remove the code.

Hillard Sterling, an antitrust attorney with Gordon & Glickson in Chicago, predicted the judge would ultimately impose some sanctions that go beyond the federal settlement, but not by much.

The judge could conceivably order Microsoft to allow computer makers and consumers to remove some bundled products, but requiring a modular version of Windows is likely to remain a "pie-in-the-sky" hope for the states, he said.

"She will identify applications that arguably further Microsoft's monopolistic activities ... She may find such things as audio and video players to be a removable application for computer manufacturers or consumers that would stop Microsoft from making monopoly inroads into the Internet markets," Sterling said.

Schwab's Olbeter agreed that the judge might tinker with some aspects of the remedy. Areas that may come under scrutiny include a "fairly weak" enforcement mechanism, that would allow a three-member "technical committee" to monitor Microsoft's compliance, he said. See full story.

The states' proposed remedies would also require Microsoft to place its Internet Explorer browser in the public domain and to ensure that its popular Office software suite is translated to work with non-Windows operating systems.

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